Doctoral Dissertation Research in DRMS: Revisiting prospect theory under conditions of chronic loss and the attribution of value

Ohio State University Research Foundation -Do Not Use, Columbus OH

Investigators

Abstract

Prospect theory helps to describe certain choice and preference behaviors that violate those anticipated by expected utility theory; in its basic form, it suggests that assessments of the potential outcomes in a choice problem are a function of two judgmental operations. First, people tend to evaluate potential outcomes based on discernable changes in welfare relative to an easily accessible reference point (e.g., one's current level of welfare) rather than final states (which for many accrue over a much longer temporal period). As a result, the value function that describes these evaluations is concave in the domain of gains and convex in the domain of losses. Second, in the minds of most, losses loom larger than gains. As a result, the value function that is defined by prospect theory is steeper in the domain of losses than it is in the domain of gains. A host of experiments have yielded results that support prospect theory. Most of these have taken the form of single event, dichotomous choice experiments in which subjects are asked to select a preferred option from a set framed in terms of either losses or gains. Despite the strength of the underlying theory and the wealth of previous research, however, several open questions about the universal applicability of prospect theory still remain. Two such questions deal specifically with the observation that people overweight the value of losses relative to gains of the same magnitude. This first component of this proposed research sets out to examine the effect of recent experiences (e.g., a consecutive streak of losses or gains) on an individual's perception of subsequent losses or gains, as well as the effect of chronic loss or chronic gain on an individual's affective state. It is hypothesized that the experience of chronic loss will result in an individual developing a negative affective state which, in turn, will result in choices that do not conform to those predicted by prospect theory. The second component of this proposed research sets out to assess the strength of prospect theory for individual choices made under conditions of attribution; for example, how does an individual (a) value the losses or gains of others as compared to (b) how this same individual thinks that others value their losses or gains? It is expected that the explanatory power of prospect theory will again be limited and that subjects will (a) place an equal value on losses and gains of others, and (b) undervalue the losses of others as compared to their own. The proposed activities have broader impacts for the fields of risk communication and decision making. Testing the assumptions of prospect theory and its goodness of fit under two relatively common risk-policy contexts - when decision makers (1) faced with chronic losses (or gains) must make judgments about future potential gains and losses, and (2) must attribute value to the losses or gains of another party - will help us to better understand potential judgmental biases that exist under these conditions and will inform the design of more effective risk communication efforts and decision aiding tools.